According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount $\Delta$G and the planned expenditure schedule by an equal amount, then equilibrium income rises by:
A) one unit.
B) $\Delta$G.
C) $\Delta$G divided by the quantity one minus the marginal propensity to consume.
D) $\Delta$G multiplied by the quantity one plus the marginal propensity to consume.

Question

Quizplus · Accepted Answer

In the Keynesian-cross analysis, an increase in government spending leads to an increase in equilibrium income by a multiplier effect. The multiplier is defined as 1/(1 - MPC), where MPC is the marginal propensity to consume. Therefore, the increase in equilibrium income is the initial increase in spending divided by (1 - MPC), making option C correct.

According to the Keynesian-Cross Analysis, When There Is a Shift Δ\DeltaΔ

According to the Keynesian-Cross Analysis, When There Is a Shift $\Delta$